Buying a new car is exciting. But how do you qualify for financing? Is it as bad as buying a house? How long does the process take?
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We answer these questions and more below.
Just like when you buy a home, you should consider getting pre-approved for a car loan. This is especially important if you are going to go to the dealership with your own financing. If you plan to use your bank, credit union, or any other bank outside of the dealership, you’ll want that pre-approval letter.
A pre-approval will help you in a few ways:
- You’ll know how much you can afford. This will prevent you from shopping for cars that are outside of your price range. Know what you can afford and you can save time by shopping for the cars that you can afford.
- You’ll have an easier time negotiating a price. When you know you have financing, you can use that as a bargaining tool when you negotiate the price of the car. Dealers have a variety of factors they consider when giving you a price for the car. Knowing that you have financing and can take that financing to any dealership can help you have the upper hand when negotiating.
- You can review the terms. Knowing the terms of various loans can help you pick a lender before you even find a car. This can help speed up the process when you are ready to buy a car. If you have to pick the right loan/lender after finding a car, you’ll slow the process down and risk someone else buying your car.
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The Necessary Paperwork
So what do you need to get pre-approved or qualified for an auto loan? Luckily, it’s a lot easier than buying a home, but there’s still enough paperwork you need to get approved.
- Proof of who you are and where you live – This is the easy step. You just need to prove to the lender that you are who you say you are and that you live where you say you live. This is the law, so don’t try applying for an auto loan without proper identification.
- Proof of your income – You must prove that you make what you say you make. It’s not enough to say that you make $100,000 per year. Instead, you must show the lender that you receive it. You can do this with your paystubs, usually the paystubs covering the last 30 days suffice. You can also prove receipt of your income with one paystub and your last two bank statements showing receipt of the income that matches the amount on the paystub.
- Decent credit – Ideally, you want a great credit score in order to get a car loan. You’ll get the best terms and the lowest interest rates that way. If you don’t have great credit, you may still qualify, but for tougher terms or higher interest rates. The exact credit score you need depends on the lender whether it’s a bank or the car dealer. In some cases, though, if you have a score lower than 640, you may need a co-signer to get the loan you need. If you can’t get financing the traditional way, you can always try a ‘bad credit auto dealer.’
- Money down on the car – You can put money down on the car in two ways. The traditional way is obviously to put cash down on the car. The amount you put down depends on what you can afford. Dealers don’t have a minimum you must put down, but the higher the down payment is the lower the rate they usually give you. You can also use your trade-in as your down payment. You can either trade it in at the dealer or sell it privately and use the cash as your down payment.
If one dealer or bank turns down your request for financing, look elsewhere. Getting auto financing isn’t nearly as hard as qualifying for a mortgage. Credit unions often have less stringent guidelines than banks or car dealers and as we said above, there are plenty of ‘bad credit dealers’ out there that can help you get financing on a car. The trick there is that you usually have to buy a used car versus a new car and you may not have the friendliest terms. The good news though, is that you can refinance the auto loan just like a car loan if you should need to in the future.
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